ExxonMobil Goes from Hero to Zero. Time to Reconsider Oil?

Market Commentary
November 27, 2020

By Acuity Trading

Since we’re on the subject of heroes, it seems appropriate to mention John Davison Rockefeller, who changed the face of the oil industry. Rockefeller founded Standard Oil Company in the 19th century and went on to become the richest man in the US. The company was such a juggernaut that it led to the enactment of US anti-monopoly laws that are still in force today. Standard Oil was renamed Exxon Corp in 1972 and went on to merge with Mobil in 1999 to form ExxonMobil. For decades, ExxonMobil dominated the oil industry.

On a Slippery Slope

With a market cap of $134 billion, ExxonMobil is now the world’s 66th largest company. It’s difficult to image that merely 7 years ago, investor attention was focused on news of ExxonMobil overtaking Apple to become the world’s largest company. The oil major’s market cap was then north of $400 billion. While ExxonMobil’s market cap has shrunk to almost a fourth of that figure, Apple has reached a whopping $2 trillion. And it’s not even the world’s largest company.

Why does the market cap matter, anyway? It is in fact the single most important datapoint for investors. It gives the most genuine idea of how the market values a company’s stock and allows an “apples-to-apples” comparison between stocks. Many new traders believe the share price is a good measure, but a stock split can halve a company’s share price and not impact its value in the slightest.

 

Simply Unable to Strike Oil

How did ExxonMobil go from #1 to #66? ExxonMobil has even lost its position of being the largest oil company. In early October this year, NextEra Energy replaced ExxonMobil as the largest US energy firm. A few days later, archrival Chevron surpassed ExxonMobil’s market cap. Taking the global market in consideration, Saudi Arabia’s Saudi Aramco and India’s Reliance Industries have a higher market cap than ExxonMobil.

Plummeting oil prices this year has certainly been a big blow for ExxonMobil. But we can’t blame everything on the pandemic. Instead of drilling for oil, ExxonMobil seems to be unwittingly digging its own grave. Its downward journey was marked by some wrong decisions, long before “coronavirus” became a part of our daily vocabulary.

In December 2009, ExxonMobil acquired natural gas producer XTO Energy for around $40 billion. Natural gas prices declined sharply in 2016, falling to near 20-year lows. By 2019, natural gas prices had collapsed due to mild weather conditions, the resumption of nuclear power plants in Japan, increased availability of LNG, and overproduction of natural gas from shale fields in the US.

ExxonMobil had a spot of bad luck too. Take its huge investments in Russia for instance, which led to the discovery of a massive Artic oil field. However, the company was forced to abandon the project, with US imposing sanctions on Russia.

 
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Will ExxonMobil Ever Come Clean?

ExxonMobil could have overcome these setbacks with some shrewd moves in the right direction. While other oil majors began exploring electric and renewable energy sources (mainly wind and solar), ExxonMobil refused to navigate the shift from fossil fuels to clean fuels.

Even as early as 2008, Neva Rockefeller Goodwin said at a shareholder meeting, “ExxonMobil is profiting in the short term from investments and decisions made many years ago, and by focusing on a narrow path that ignores the rapidly shifting energy landscape around the world, including developing nations.”

Should ExxonMobil make the transition to clean energy? To begin with, oil is going to get increasingly difficult to discover and drill. There’s already a considerable slowdown in fossil fuel extraction in countries like Algeria, Argentina, Guinea, Mexico, Venezuela, and the UK. As fossil fuels deplete, extraction will become increasingly expensive, while the quality of crude will continue to deteriorate.

The world will eventually need to make the shift to renewable energy. With advancements in technology, the generation and storage of renewable energy will become more economical and efficient.

Against this backdrop, investor sentiment for ExxonMobil turned vastly negative, as can be seen on the Acuity Trading Dashboard. Sentiment was also hit by Biden’s win in the US Presidential election, given his support of clean and renewable energy as a way of reducing global warming. After all, Climate Change was a key agenda for the Democrats during the election campaign. Acuity’s US Elections widget indicates its high Share of Voice (how frequently these topics were covered by the Democrats during the election campaign). Climate change even beat talks around coronavirus and the economy.

 
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Will Upstream Prove to Be Its Downfall?

While oil companies are investing in identifying and honing alternative solutions that have low to no carbon footprint, ExxonMobil doubled its efforts in oil and natural gas. The company said last year that it plans to invest up to $35 billion per annum over the next few years to increase its upstream production.

Meanwhile, oil demand forecasts remain bleak. Earlier in November, the OPEC (Organisation of Petroleum Exporting Countries) lowered its expectations for global oil demand in 2021 by 300,000 barrels per day (bpd) to around 96.3 million bpd. The downward revision was triggered by concerns around the resurgence of Covid-19 cases in Europe and America impeding recovery in the global economy and affecting the demand for oil.

Will ExxonMobil’s plan to set itself apart from other oil majors reap huge returns or prove to be a strategic mistake? Whatever the case may be, ExxonMobil has the wherewithal to withstand the current challenges, given its long history of financial strength.

 
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Also, as the economy emerges from the pandemic, oil and gas demand will recover. Sentiment for oil is already turning positive, as can be seen from the Acuity Trading Dashboard. It seems highly unlikely that oil will be replaced as the leading source of energy for at least another couple of decades. Moreover, given its huge cash flows and long-term debt constituting a minuscule part of its capital structure, ExxonMobil can simply acquire a green energy company whenever it decides to take that route.

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